International/global trade is the exchange of goods between different countries. Naturally, every country has unique crops, expertise, or capabilities depending on their climate, weather, soil fertility, technological advancement, and other factors such as wealth.
International trade is the exchange of goods and services between countries. This type of business gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then lead to a rise in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes
International/ foreign trade creates an environment where prices, supply & demand are determined by the global economy. External trade is divided into three groups;
- Export Trade: When a trader from home country sells his goods to a merchant located in another country, it is called export trade. For e.g. a trader from India sells his goods to a trader based in China.
- Import Trade: When a trader in home country obtains or purchase goods from a trader located in another country, it is called import trade. For e.g. a trader from India purchase goods from a trader located in China.
- Entrepot Trade: When goods are imported from one country and then re-exported after doing some processing, it is called entrepot trade. In brief, it can be also called as re-export of processed imported goods. For e.g. an Indian trader (from India) purchase some raw material or spare parts from a Japanese trader (from Japan), then assembles it i.e. convert into finished goods and then re-export to an American trader (in U.S.A)
Entrepot trade is an interesting form of foreign trade as it allows the manufacturer to import raw material; turn it into a finished product and export it into another country. However, although international trade has existed for a long time; it has only become more prevalent recently. Therefore, there are some kinks that still need to be smoothened along the way, but international trade has numerous benefits.
- International growth
According to the UKTI, there is a possibility exporting companies can achieve levels of growth not possible domestically. Therefore, a company’s sustained revenues from a well-diversified portfolio of overseas customers are vital for a business to benefit.
Business Case Studies asserts overseas trade works to increase financial performance and ultimately augment the returns on investment. There is then potential for businesses to amplify the commercial lifespan of existing products and services, even if they had become less popular in domestic markets.
- Spreading business risk
Director of Smart Currency Exchange Director Charles Purdy says a company may protect itself from unprecedented global disasters and market upsets such as financial meltdown, earthquakes, and civil unrest through overseas business. The home market of a business could contract or even disappear during these volatile times, but the business may be saved by the revenue it generates overseas.
- Market competition
If a business competes in several markets, then it may have the ability to thrive overseas, Business Case Studies states. Companies can improve their competitiveness through the observation of a range of trends in quality, product development, design, and packaging.
- Exchange rates
As a business begins to trade overseas, the reliance it has on its domestic market reduces and risks can be spread, especially in relation to exchange rates according to Business Case Studies. For example, as BCS asserts, if a business does most of its trade in US Dollars it may be beneficial for said business to trade with Japan to spread the exchange rate risk between the Dollar and the Yen, therefore creating benefit for the company.
- Political changes are a unique risk that can be multiplied with every foreign presence
Political changes are nothing new to the business world. Domestic policy changes can affect the way organizations do business. International trade expands this risk every time a new foreign market is entered. Income streams can be protected, but there is no protection when political change happens and that could create a detrimental business arrangement.
There are cultural risks that must be considered
Not taking into account the changes in culture that occur in foreign markets can be a very costly mistake. Marketing beef in India, for example, could be a fatal mistake for an organization. Even the way marketing is approached for a product can be very different in the West compared to the East. Without an awareness of cultural habits and needs, international trade can do more harm than good.
- Exchange risks will always exist
Foreign currency fluctuations happen every day. This means the value of existing goods change daily. So does the value of an existing liability. If enough changes occur, a business can immediately become non-competitive because there is less value or more debt involved with their presence in international trade. The end result is a loss of sales, loss of revenue, or a loss of value and it all falls outside of the control of the business.
- There is a higher risk of not receiving payment for services rendered.
The risks of not being paid for goods or services is often higher in an international trade arrangement than in domestic arrangements. It is necessary for organizations to perform their due diligence before entering a foreign market with other organizations or countries so this risk is mitigated. Having insurance in place or a letter of credit issued may also be necessary.
Sourced from: http://brandongaille.com/8-international-trade-pros-and-cons/